I have two decades of experience trading currencies and fixed income instruments. My market analysis skills were honed during my tenure as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006 as Chief Currency Analyst, I have been publishing a daily commentary on global markets. I lead a team with 24/7 North America, Asia and Europe forex market coverage. Born in Dublin, Ireland, I hold a degree in Economics and Finance from Trinity College Dublin.

Bank of England On Course For Rate Hike In 2015

Sterling fell against the U.S. dollar to a 10-week low of $1.6726 and the euro rose against the pound to £0.7986 on Wednesday after the Bank of England (BoE) hinted it is on course to boost its interest rates in 2015 if U.K. wage growth increases.

The BoE is the presumed major economy frontrunner for a post-recession rate hike, but Governor Mark Carney made clear that higher rates will be a function of less spare capacity in the labor markets. This morning’s U.K. data shows that there is a lack of wage pressure. Average weekly earnings, including bonuses, fell by -0.2%, year-over-year — the first negative reading in five years — even as the labor market continues to strengthen (July’s claimant count was 33.6k).

U.K. Wages Still Provide Slack

The decline in total pay will pose a challenge for the BoE’s timing for its first post-recession monetary policy tightening. A good percentage of the market has been pricing in a hike as early as this November. This morning’s BoE wage forecasts will force the market to have a rethink on rate-rise timing. As expected, U.K. policymakers would prefer to see incomes rising at a steady level before deciding whether they should change course. The BoE’s quarterly Inflation Report contains both hawkish and dovish messages; nothing new from a central bank. Carney indicated that annual inflation would stay at roughly +2% over the next two to three years as long as interest rates rise in expectations in financial markets. However, with the BoE slashing its U.K. wage growth forecast for the remainder of this year in half to +1.25% from +2.5%, it will prompt investors to push their U.K. rate hike timing further out the curve. The bank’s forecast suggests a first rate hike in early 2015 rather than a fourth-quarter move and just ahead of the Fed’s expected first hike in mid-2015.

GBP Bloodied, Battered, Bruised

Sterling has taken a battering after this morning’s U.K. reports were released. Overall, the market has been very bullish that the BoE will be the first to spike rates. Both the European Central Bank (ECB), which is fighting deflation concerns, and the Bank of Japan’s (BoJ) sales tax growth worries, do not provide much opposition to a U.K. rate hike. However, both economies provide support for a weaker global growth scenario, a variable that obviously will trump the timing of a rate hike for Fed Chair Janet Yellen and Carney. The market will be disappointed with the BoE’s interpretation on rate timing. This will call into question long GBP positions outright and on the crosses. The pound falling through May’s low of £1.6689 opens up the way to test the 200-DMA at around £1.6645, while EUR/GBP will find a smidgen of support for the time being. Last Friday’s peak of €0.7989 threatens further technical gains to €0.8015 and €0.8030.

Japanese Growth Crumbles

The BoJ continues to wash away its worries with ‘modest’ growth lingo, but it will always embrace a weaker yen no matter how it’s achieved. Last night’s initial estimate of Japan’s second-quarter gross domestic product saw the economy contract by the biggest margin since the Tōhoku earthquake and tsunami more than three years ago. Nevertheless, the headline was not as bad as expected. Among the various components, private consumption was down by 5% — bigger than the estimated -3.7% drop — and the net exports contribution was at -1.1%. From a stronger economic standing, the government’s consumption estimate was the only positive component, rising +0.4% from +0.1% in the first quarter. No matter the headline, Japanese officials continue to talk up the economy. Economic Minister Akira Amari said the gradual “recovery trend is continuing and policy response would be flexible.” Officials did not allude to the possibility of further stimulus, attributing the weakness to the impact of April’s sales tax hike, and stating that no extra budget is needed at this point. Much like the ECB, the market will have to wait-and-see how lower rates and more credit will play out before the bank will open the liquidity tap again. The BoJ’s Governor Haruhiko Kuroda released the minutes of the bank’s mid-July meeting, stating that Japanese policymakers would examine “risks and modify policies if necessary.”

American Labor Market Strengthens

Yesterday’s U.S. June Job Openings and Labor Turnover Survey, or Jolts report, showed job openings swelled to their highest level in 10 years, more or less in line with expectations. The data indicates there are about two unemployed job seekers for each available job in the U.S. The report also saw a rise in the number of U.S. workers quitting their jobs (+2.53M versus May’s +2.49M). This indicates strength and flexibility in the American labor market. A sign that more individuals have quit gainful employment usually indicates that they are also confident in finding other work and sometime with higher pay.

Yellen has indicated the report is one of her key metrics for gauging labor demand in the U.S. economy, and investors will pay close attention to her speech for hawkish tones at the Jackson Hole Economic Symposium in late August. It is here that the market will be hoping to get a sense of the Fed’s current thought process. Fixed-income dealers in particular will be hoping to be in a position to better align their expectations on the pace of Fed rate hikes for the foreseeable future.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.